Apple’s Fintech Play Outside the U.S., Apple Ecosystem Strength by Country, Google to Unveil Foldable Pixel (Daily Update)
Hello everyone. We will continue the discussion found in yesterday’s update regarding Apple’s fintech strategy. There was a consistent theme to incoming member questions regarding Apple’s fintech strategy. After answering that topic, Neil looks at one way to measure Apple’s ecosystem strength by country. The update concludes with news of Google getting ready to unveil a foldable smartphone. Let’s jump right in.
Apple’s Fintech Play Outside the U.S.
There was one consistent theme to incoming member questions and comments regarding yesterday’s discussion about Apple’s fintech strategy: When will Apple bring these features to other countries?
Here is the current availability for Apple’s fintech portfolio:
Apple Pay: 71 countries and regions
Apple Card: U.S. only
Apple Cash: U.S. only
Apple Savings: U.S. only
Apple Pay Later: U.S. only
For a global company, the following list is far from ideal. While Apple users in the U.S. are seeing the latest and greatest from Apple in terms of the company’s fintech play, outside the U.S., it has been slim pickings. And more worrying for non-U.S. Apple customers, it’s not clear when these fintech features will become available in other countries. Apple has not given any indication of rollout timelines or even the feasibility of global rollouts. For example, the Apple Savings account launched on Monday is only available to U.S. residents with a social security number of individual taxpayer identification number. There are no announced plans for additional country support, partially because Apple Savings requires an Apple Card which is only available in the U.S.
We can say with confidence that Apple would want to bring these fintech features to more countries. The ideals underpinning these features are universal (financial well-being and data privacy), even though they may not necessarily match all government allowances and goals.
As for why these features have limited distribution, my suspicion is
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Apple Event Highlights (Daily Update)
Hello everyone.
The plan is to go over some of the major highlights / takeaways from Apple’s “Far Out” event. We will focus on the details on Monday.
Let’s jump right in.
Attending the Event
This was the first full-blown in-person product unveiling that Apple has held in three years. WWDC was in some ways a trial run.
There were some changes from prior events.
Security was noticeably tighter with metal detectors in use for the first time (at least that I recall).
All visitors needed to submit a negative COVID test.
The presentation shown in Steve Jobs Theater was taped instead of taking live on stage.
The more interesting takeaway for me was how natural it felt to watch a taped presentation in Steve Jobs Theater. It felt just like any other prior event. Much of that was due to Apple’s taped presentations being superior to traditional onstage keynotes. Apple is able to do so much more from a production standpoint with taped presentations. Tim Cook went on stage at the beginning with a few words about how these events are ultimately about people coming together. There is much truth with that statement. Going forward, the taped presentation shown at Steve Jobs Theater format works. In many ways, it’s like a movie premiere.
About the Rumors
The Apple rumor beat has changed. Apple has seen success in going after leaks and security holes. Whatever remains doesn’t have the same kind of cohesiveness and punch as before.
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Apple's WWDC 2022 (Daily Updates Recap)
Earlier this month, I flew out to Cupertino to attend Apple’s in-person WWDC event.
The best way of describing the event at Apple Park was Apple getting back into the swing of hosting in-person events. Excluding the masks and hand sanitizer stations, it felt like a usual in-person Apple event. There was a waiting area for press, hundreds of Apple Retail greeters with an infectiously-positive mood, and a product demo area for the media following the keynote.
My estimate is there were 200 to 250 members of the press and media in attendance, including some international press. That’s a smaller crowd that usual. As for developers, there were approximately 1,000. In terms of Apple employees, my best count was that 2,000, possibly even as many as 2,500, watched the keynote.
The event also served as Apple’s first “open house” for its massive circular ring building at Apple Park. All prior Apple Park events for the press took place at Steve Jobs Theater which is located on the other side of Apple Park. For those events, Apple was careful not to have any visitors stray to other parts of the campus.
The Ring at Apple Park (Above Avalon)
The keynote viewing area, as shown below, was intelligently thought out. Apple opened the giant glass walls found in the employee cafeteria to create an indoor / outdoor venue. This served as an adequate solution for getting a lot of people out of the sun. As for those who were baking in the sun, they were given more comfortable, beach-style chairs in return. For the first time, the best seats in the house at an Apple keynote were in the middle of the audience, seated in the shade.
Inside The Ring at Apple Park (Above Avalon)
Interestingly, Apple began airing the taped keynote three minutes earlier than the public streaming. The delay seemed intentional, possibly as a way to encourage live blogging / tweeting since there didn’t seem to be any other reason for starting it early. The largest screen that Apple relied on to show the presentation was shockingly good – the clearest big screen I have ever come across, while the sound system made it seem like I was in an indoor event.
As for why Apple went through the trouble of having ~1,000 developers come on campus despite having an all-virtual WWDC with labs and sessions occurring online, the company missed the community aspect that had become a WWDC tradition. There are clear benefits found with having a virtual WWDC, such as a significant increase in accessibility. However, the face-to-face interactions and social elements that developers experience have been sorely missed the past two years.
My suspicion is that Apple will rely on the event structure again, including in September with the upcoming product event. Apple likely hopes it will be able to host the event inside Steve Jobs Theater. All-in-all, the format worked well, with meticulous planning and preparation throughout. Apple has gotten really good at putting on these massive events. More importantly, an event structure reminiscent of a movie premiere offers a good combination of virtual benefits such as the well-polished taped presentation with animated transitions that can never be replicated in real time and in-person perks like a product demo area.
An Ecosystem Event
WWDC is all about software updates with new hardware sprinkled in from time to time. As Tim Cook put it when concluding the keynote: “[W]e pushed our software platforms forward in some incredible new ways. Introducing features and capabilities that will enable our developers to do amazing work and provide our users with exciting new experiences."
A different way of thinking about WWDC is that it’s Apple’s annual ecosystem event – the one time each year when Apple shows how it is pushing its entire ecosystem forward.
An Above Avalon membership is required to continue reading this article. Members can read the full article here.
The full article includes the following sections:
Attending the Event
An Ecosystem Event
iOS 16 Takeaways
The New MacBook Air
The iPadOS vs. macOS Debate
The Big Surprise Found With Apple Pay Later
Revisiting Apple’s Credit Kudos Acquisition
CarPlay Mistruths
My Full Notes from the Keynote
Winners and Losers From WWDC 2022
An audio version of the article is available to members who have the podcast add-on attached to their membership. More information about the add-on is found here.
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Above Avalon Podcast Episode 178: Welcome to 2021
Episode 178 is dedicated to discussing Apple’s 2020 and where the company finds itself as we enter 2021. The episode goes over the first Above Avalon year in review that was published for 2020. Neil discusses his five favorite Above Avalon weekly articles from 2020 and the sub themes that were found in the 196 daily updates published in 2020.
To listen to episode 178, go here.
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Above Avalon Podcast Episode 172: Hidden Acceleration
Apple’s underlying ecosystem strength has been gaining momentum for years - it’s just been masked by people holding on to their iPhones for longer before upgrading. In episode 172, Neil quantifies how much Apple’s ecosystem is growing. Additional topics include the problem found with using overall revenue trends to analyze Apple growth, the Apple Services myth, and why non-iPhone revenue growth matters so much.
To listen to episode 172, go here.
The complete Above Avalon podcast episode archive is available here.
Apple's Ecosystem Growth Is Accelerating
The two most recent Above Avalon articles took a look at how and why Apple’s ecosystem is giving the company a major advantage against the competition.
With Apple reporting 3Q20 earnings two weeks ago, there is value in quantifying how much Apple’s ecosystem is growing. The data should startle the competition. Apple is seeing a clear acceleration in its ecosystem growth as hundreds of millions of iPhone-only users move deeper into the Apple fold by subscribing to various services and buying additional products.
Measuring Ecosystem Growth
There are a number of ways one can attempt to track or measure Apple’s ecosystem growth.
Number of devices per user
Number of paid subscriptions per user
In covering Apple’s business from a financial perspective, my modeling work includes keeping up-to-date estimates for most of the preceding data points. However, there is one metric missing from the list that may come as a surprise: overall revenue. Considering Apple provides this data point every three months, such an exclusion may seem peculiar. Wouldn’t Apple revenue shed light on how the Apple ecosystem is performing?
Relying on overall revenue for analyzing Apple’s ecosystem growth will lead to faulty conclusions. In Exhibit 1, Apple’s revenue is graphed on a trailing twelve months (TTM) basis. This is done to smooth out the seasonality found in Apple’s business (i.e. sales are concentrated around the holidays). The takeaway from the exhibit is that higher revenue demonstrates Apple’s ecosystem continues to grow although the rate of growth has slowed dramatically.
There is one problem with such a takeaway: It’s wrong.
Exhibit 1: Apple Revenue (TTM)
Click / tap exhibit to enlarge.
Overall revenue trends are masking what is actually occurring with Apple’s ecosystem. In FY2019, the iPhone was responsible for 55% of Apple’s overall revenue. On its own, that’s not an issue for Apple. The iPhone is part of Apple’s ecosystem after all. However, Apple has become increasingly dependent on existing users upgrading their devices to generate iPhone revenue. This has resulted in Apple’s overall revenue being heavily influenced by iPhone upgrading trends.
During periods of robust iPhone upgrading, Apple’s overall revenue shows stronger growth. When iPhone upgrading slows, overall revenue growth also slows to the point that Apple’s ecosystem may appear to be plateauing or even contracting (as seen in Exhibit 1). This was a major issue at the end of 2018 and early 2019 as slowing iPhone upgrades led many to conclude that Apple was in big trouble in China and other geographies.
Since iPhone upgrading trends have little to no direct impact on Apple ecosystem viability or strength, a better approach to get insights on Apple’s ecosystem growth is to divide Apple’s revenue into two categories:
iPhone
non-iPhone (Services, Mac, iPad, Wearables, Home, and Accessories)
As seen in Exhibit 2, breaking Apple’s overall revenue into iPhone and non-iPhone revenue leads to a completely different view of Apple’s growth trajectory. Non-iPhone revenue (the red line) continues to demonstrate very strong momentum while iPhone revenue (the blue line) is trending at the same level that it was in 2015.
Exhibit 2: Revenue (iPhone vs. Non-iPhone) - TTM
Click / tap exhibit to enlarge.
A different way of looking at this data is to consider revenue growth rates. Using the revenue figures from Exhibit 2, we are able to create Exhibit 3, which displays year-over-year change in revenue for both iPhone and non-iPhone.
Non-iPhone revenue growth (the red line) has outpaced iPhone revenue growth (the blue line) for the past seven quarters. The higher growth rates for iPhone revenue in 2018 were due to higher iPhone ASPs caused by Apple unveiling the iPhone X. Excluding those quarters, non-iPhone revenue growth has been trending stronger than iPhone growth since 2016. This is a sign that Apple’s underlying ecosystem strength has been gaining momentum for years - it’s just been masked by people holding on to their iPhones for longer before upgrading.
Exhibit 3: Revenue Growth YOY (iPhone vs. Non-iPhone) - TTM
Click / tap exhibit to enlarge.
What is driving the non-iPhone revenue strength shown in Exhibits 2 and 3? The answer is found in the strong iPhone revenue trends from a few years ago. Years of strong new user growth driven by the iPhone is now contributing to hundreds of millions of iPhone-only users moving deeper into the Apple ecosystem. This trend began in earnest around the beginning of 2017.
The Services Myth
Some may look at the preceding exhibits and say that the data is still incomplete. Apple Services include a number of recurring revenue streams such as iCloud, Apple Music, and various paid subscriptions. Given the recurring nature of something like paid iCloud storage, it ends up being easier for Apple to report year-over-year Services growth. Apple’s Services business accounts for 40% of non-iPhone revenue. There is a different dynamic found with hardware revenue. Since hardware isn’t a recurring revenue stream, year-over-year growth ends up being that much harder to achieve as Apple is in effect needing to replace every dollar of revenue with new sales.
(One can argue something like the iPhone Upgrade Program is a recurring revenue stream for hardware. However, that ends up being a stretch. The Upgrade Program is a loan with a built-in upgrade optionality after the 12th payment. That is very different than something like an iCloud or Apple Music subscription.)
To address this issue, non-iPhone revenue can be broken out into Services and Products (excluding iPhone). In what will come as a shock to many people, Exhibits 4 and 5 show how Products revenue excluding iPhone (i.e. iPad, Mac, Wearables, Home, and Accessories) is now growing at nearly the same pace as Services. This represents a major narrative violation as consensus spent years positioning Services as Apple’s growth engine.
Exhibit 4: Revenue (Apple Services vs. Apple Products Excluding iPhone) - TTM
Click / tap exhibit to enlarge.
Exhibit 5: Revenue Growth YOY (Apple Services vs. Apple Products Excluding iPhone) - TTM
Click / tap exhibit to enlarge.
Based on Apple management commentary, we know that upgrading is not impacting the iPad, Mac, and wearables as much as the iPhone. Approximately half of people buying iPads and Macs are new to the product categories. For Apple Watch, the percentage is more than 75%. The new user percentage for iPhone sales is a fraction of those percentages. This tells us that iPad, Mac, and wearables sales are a very good indicator of Apple ecosystem strength.
Tying It All Together
One way of thinking about the Apple ecosystem is to view it as a pie. There are two ways for Apple to expand the pie: Bring in more customers and have existing customers spend more on services and products in the ecosystem (higher ARPU).
New users entering the ecosystem - The iPhone SE should not be underestimated as a successful tool for bringing Android users into the Apple fold.
Existing users moving deeper into the ecosystem - iPhone users are buying iPads, Macs, and wearables as well as subscribing to various Apple services.
Apple currently finds itself in an ecosystem expansion phase. Hundreds of millions of people with only one Apple device - an iPhone - are embarking on a search for more Apple experiences. We see this with non-iPhone revenue growing by 14% in 3Q20 on a TTM basis, which is higher than growth rates seen in the mid-2010s, as seen in Exhibit 6.
Exhibit 6: Apple Non-iPhone Revenue Growth Projection
Click / tap exhibit to enlarge.
Looking ahead, my estimates have non-iPhone revenue accelerating from 14% growth to 20% growth in the coming quarters. iPad, Mac, and wearables are a major source of that growth acceleration. Considering how Apple is working off of a much larger revenue base, for revenue growth percentages to actually increase this far along in the process is intriguing. The takeaway is that Apple’s ecosystem is gaining momentum at a pace that should frighten the competition.
Hundreds of millions of people will be buying their first Apple wearable device in the coming years. Given the inherent nature of wearable devices - new form factors designed to make technology more personal - it is very likely that one Apple wearable purchase will eventually lead to additional Apple wearable purchases. Apple can then leverage high-margin Services to run with more aggressive pricing on wearables (and other Apple devices) which only ends up boosting demand.
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For additional discussion on this topic, check out the Above Avalon daily update from August 13th.